Income Tax Appellate Tribunal - Delhi
Laxmi Bai Foundation,, vs Department Of Income Tax on 24 November, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C': NEW DELHI
BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND
SHRI K.G. BANSAL, ACCOUNTANT MEMBER
I.T. (SS) A. No.33/Del/2005
Block Period : 1989-90 to 1999-2000 (Upto 15.01.1999)
M/s. Laxmi Bai Foundation, Dy. Commissioner of Income-tax,
C/o Convent of Rani Jhansi, Vs. Central Circle-13, New Delhi.
Sector VIII, R.K. Puram,
New Delhi.
PAN: AAAAL0348K
I.T. (SS) A. No.80/Del/2005
Block Period : 1989-90 to 1999-2000 (Upto 15.01.1999)
Asstt. Commissioner of Income-tax, M/s. Laxmi Bai Foundation,
Central Circle-13, New Delhi. Vs. C/o Convent of Rani Jhansi,
Sector-VIII, R.K. Puram,
New Delhi.
(Appellants) (Respondents)
Assessee by: Shri P.C. Parwal, FCA.
Department by: Shri H.L. Dihana, CIT-DR.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER:
Thee two cross appeal filed by the assessee as well by the revenue, are directed against the order dated 24.11.2004 passed by the learned Commissioner of Income-tax (Appeals) in the matter of a block assessment 2 made by the Assessing Officer under sec. 158BC of the Income-tax Act, 1961 (the Act) for the block Assessment Years 1989-90 to 1999-2000 (till 15.01.1999).
IT(SS) A No.33/Del/2005:
2. We shall first take the appeal filed by the assessee. Ground No.1 raised by the assessee in this appeal is as under:-
"The learned Commissioner of Income Tax (Appeals) has erred in facts and in law in denying exemption u/s 10(2) and thereby considering the surplus as per Income and Expenditure amounting to Rs.64,53,977/- for different years falling in the block period as undisclosed income. (AY 1989-90 Rs.6,215/-, 90-91 Rs.5,94,888/-, 91-92 Rs.1,67,611/-, 92-93 Rs.11,35,820/-, 93-94 Rs.13,04,039/-, 94-95 Rs.14,07,039/-, 95-96 Rs.6,48,505/-, 96-97 Rs.3,74,842/-, 97-98 Rs.2,29,848/-, 98-99 Rs.4,96,389/-, 99-00 Rs.88,781/-)."
3. There was a search and seizure proceedings under sec. 132(1) on 15.01.1999 in the case of various societies running in schools, during the course of which, various documents and papers were found and seized. In the case of the assessee, survey action under sec. 133A was taken on the same date, i.e. 15.01.1999 and various documents were impounded under sec.131 of the Act. Thereafter, the AO issued notice under sec. 158BD of the Act, which was served upon the assessee on 29.11.2000. The assessee filed return of block period on 23.04.2000 disclosing undisclosed income for different Assessment Years falling within the block period at Rs. `Nil'. It 3 was noted by the AO that the assessee had not filed regular returns for any of the Assessment Year till 1997-98. However, the assessee filed return for the Assessment Year 1998-99 at `Nil' in response to the notice issued under sec.
142(1) by the AO. For the Assessment Year 1999-2000, the assessee suo moto filed a return showing total income at Rs. `Nil'. The returns of income for these two Assessment Year 1998-99 and 1999-2000 were initially processed and thereafter, the assessment order was made determining the total income at Rs.21,75,100/- and Rs.16,32,340/- respectively though income and expenditure statements in these two years indicated surplus of Rs.4,96,389/- and Rs.88,781/- respectively.
4. The assessee society was registered on 23.07.1977 with the Registrar of Societies with the object to run educational institution. This society was not registered under sec. 12A of the Act. The assessee society is running one un-recognized school named Convent of Rani Jhansi School at Sector VIII, R.K. Puram, New Delhi where the classes from Nursery to 7th Standard were being conducted. It was stated that the land and building of the school were owned by M/s. Rajinder Nagar Education Society. During the course of survey at the school premises, certain documents marked (MS-10), Annexure A1 to A8 were found and impounded. Copies of these documents were provided to the assessee by Investigation Wing. The AO then issued a 4 notice under sec. 143(2) on 9.05.2001, which was duly served on the same date on the assessee. The AO also issued certain questionnaire requiring the assessee to file evidences/clarification or explanation on the seized documents. During the course of assessment proceedings, the assessee's Authorized Representative appeared from time to time and filed various explanations and information. It has been noted by the AO that upto 1998- 99, income of educational institution was exempt under sec. 10(22) of the Act. Thereafter, from Assessment Year 1999-2000, it has become compulsory for every society, who used to claim exemption under sec.
10(22) to get the society registered under sec. 12A of the Act and fulfill the requirements and conditions imposed by sec. 11 to 13 of the Act in order to claim exemption of the income. The AO then deliberated upon the provisions of sec. 10(22) of the Act. The AO then noted certain facts from the seized documents and came to the conclusion that the assessee society is not entitled to exemption under sec. 10(22) of the Act.
5. Against the AO's order, denying exemption under sec. 10(22) of the Act, the assessee preferred an appeal before the learned CIT(A). It was submitted by the assessee before the CIT(A) that since the assessee's income had arisen from running of an educational school, the same is exempted u/s 10(22) of the act and thus, the question of having any undisclosed income 5 within the meaning of Chapter XIV-B does not arise. It was further submitted that as assessee's income was exempt under sec. 10(22), the assessee was not oblige to file its return of income from running the school.
It was further pointed out that the assessee was running the school without any motive of earning profit. It was also submitted by the assessee that no person or individual was entitled to any portion of such profit and if somebody is alleged to have siphoned off certain amounts of the assessee from its books of accounts, the society still cannot be denied the benefit of exemption under sec. 10(22) of the Act since it is the individual concerned who is to be hauled up for making un-authorized use of the funds of the society for his personal use.
6. After considering the assessee's submissions and perusing the assessment order, the learned CIT(A) upheld the order of the AO by holding that since the assessee did not file its return of income for various Assessment Years, which the assessee was obliged to file, the assessee's claim that its income as per its audited income and expenditure account, is to be treated as disclosed income, cannot be accepted. The CIT(A) held that the income shown in the audited income and expenditure account is to be treated as undisclosed income. He further held that adjudication of the assessee's claim of exemption under sec. 10(22) in the block assessment 6 proceedings, is outside the purview of Chapter XIV-B since in the block assessment proceedings the AO is required only to compute the undisclosed income, the provisions of Chapter XIV-B being special provision coming in operation in consequence to the search action taken under sec. 132 of the Act.
7. Being aggrieved, the assessee is in further appeal before the Tribunal.
8. In the course of hearing of this appeal, the learned counsel for the assessee submitted that identical issue had come up for consideration in the cases of other societies belonging to this group on identical facts where the Hon'ble Tribunal held that the claim of the assessee society for exemption under sec. 10(22) in respect of income from running schools is liable to be considered on merits in block assessment proceedings taking into consideration the facts of case of the assessee as to whether in a particular year or years, it existed solely for educational purpose and not for the purpose of profit. The Tribunal further directed the AO to disallow the claim of the assessee for exemption under sec. 10(22) in year or years forming part of the block period, in case he found that assessee has received any donation outside the books of accounts and were not used in furtherance of its object of running educational institution or for infrastructure development. However, for remaining years, claim of the 7 assessee for exemption under sec.10(22) was directed to be allowed. The Tribunal has passed the aforesaid order in the following cases:-
(1) Rajinder Nagar Education Society [IT(SS) A.No.34 & 84/Del/2005], order dated 29.02.2008.
(2) M/s. Nav Manav Sansthan vs. DCIT [IT(SS) A.No.32/Del/2005], order dated 27.02.2009.
(3) Mr. Virender Bhatnagar Sansthan [IT(SS) A. No.29/Del/05], order dated 13.03.2009 (4) St. Vaswani Education Society [IT(SS) A.No.30/Del/2007], order dated 28.05.2010.
9. The learned DR on the other hand, submitted that though identical issues were decided by the Tribunal in the other cases of society belonging to the same group in favour of the assessee, the department has filed appeal before the Hon'ble High and as such, the order of the CIT(A) may kindly be upheld.
10. We have heard both the parties and perused the material on record.
The issue with regard to the assessee's claim of exemption under sec. 10(22) of the Act was first decided by Income-tax Appellate Tribunal, Delhi Bench `D', New Delhi in the case of Rajinder Nagar Education Society vide order dated 29.02.2008 in IT(SS) A.No.34 & 84/Del/2005. It has been accepted by both the parties that the facts of the present case are identical to the facts in the case of Rajinder Nagar Education Society and for the similar reasons, the AO has disallowed the assessee's claim of exemption under sec. 10(22) of the Act in the block assessment. The aforesaid decision in the case of 8 Rajinder Nagar Education Society was subsequently followed by ITAT, Delhi Bench `E', New Delhi in the case of Nav Manav Sansthan in IT(SS) A.No.32/Del/05 along with IT(SS) A.No.35/Del/05 vide order dated 27.02.2009. The said decision in the case of Rajinder Nagar Education Society was also followed in the case of M/s. Virendra Bhatnagar Sansthan by ITAT Delhi Bench `E' New Delhi vide order dated 13.03.2009 in IT(SS) A.No.29/Del./05 with IT(SS)A No.85/Del/05. Thereafter the decision of the Tribunal in the aforesaid three cases namely, the case of Rajinder Nagar Education Society, Nav Manav Sansthan and Virendra Bhatnagar Sansthan were followed by ITAT, Delhi Bench-I, New Delhi in the case of St. Vaswani Education Society vide order dated 28.05.2010 in IT(SS) A.No.30/Del/2007 and IT(SS) A.No.81/Del/2007. In the case of St. Vaswani Education Society, the Hon'ble Tribunal has decided this issue with regard to the assessee's claim of exemption under sec. 10(22) of the Act by observing and holding as under:-
10. At the time of hearing both the parties have conceded that verbatim same issue as was agitated before the ITAT in the case of M/s. Nav Manav Sansthan which is one of the society mend by Shri V.K. Bhatnagar except variation in the quantum, there is no variation in other facts and circumstances. The defects pointed out by the Assessing Officer while denying the exemption under sec. 10(22) on page Nos. 25 to 30 in the impugned order are almost similar in the case of M/s. Nav Manav Sansthan. Apart from this one society, the similar dispute traveled up to the ITAT in the case of M/s. V. Bhatnagar 9 and Sansthan in the case of Rajinder Nagar Society. The ITAT has discussed this issue in the case of Nav Manav Sansthan as under:
"9. Ground No.1 raised in the assessee's appeal relates to the issue of its claim for exemption u/s 10(22) which stands disallowed by the AO as well as by the learned CIT(A).
10. During the course of block assessment proceedings, its entire income for the previous years forming part of the block period was claimed to be exempt by the assessee u/s 10(22) on the ground that it existed during the said years solely for educational purposes and not for the purposes of profit. According to the AO, the concept of profit making has been judicially reviewed in various judicial pronouncements and the position which emerges out of the same was that if any person or individual is getting personal benefit from the educational institution, then there is a profit motive in running the said educational institution. In the light of this legal position, he examined the facts of the case of the assessee and recorded the following observations :-
"1. As mentioned earlier, photocopy of all the seized material relating to all the ten schools and documents found from the residences, have already been given to the assessee by the DDIT, Inv. Itself. Photocopy of all the investigation material, bank enquiry, copy of statement from page no.481 to 561 attached with the appraisal report have already been given to the assessee much earlier. Similarly, list of parties who have been examined by the DDIT, Inv., mentioned at page no.19 and 20 of the appraisal report, have also been given to the assessee. All the seized documents have been discussed page-wise with the assessee 10 relating to all the schools and found from the residences and the comments of the DDIT, Inv., running into two volumes have also been discussed with the assessee and all the points mentioned in the appraisal report have also been noted by the assessee. From the seized documents, there are innumerable instances which reflected diversion of funds for personal benefits and understatement of income by way of various modes and drawing of income for personal benefits.
2. Donations are taken from the parents for the admission of their children in the school in cash/cheque/kind. No receipts were given for these donations and these are not entered in the books of accounts.
3. This cash was sent to the beneficiary, Shri V.K.Bhatnagar, Founder/ Chairman/ Actual Controller of all these societies. Thus, this cash is utilized for the individual benefit of Shri V.K.Bhatnagar, his family members and his companies.
4. This unaccounted cash was then invested in acquiring properties in and outside Delhi and in making investments in construction of residential block, commercial plaza, administrative block, sports complex at Gurgaon in the name of Virendra Gram.
5. Donations in kind, i.e. steel was also taken for admitting children. This steel was used for construction of residence of Mr.Bhatnagar and various commercial projects, namely, shopping plaza, medicine centre, banquet halls, luxury group housing society, etc. in Virender Gram at Gurgaon.11
6. Cash is received from the school children in various ways on account of local and outside Delhi tours and trips but this is not entered in the books rather expenditure under the head student welfare is paid to the company BIIR Ltd.
7. The precious land about 32.65 acres at Gurgaon on the main highway belonging to different societies and school was transferred in the name of Shri V.K.Bhatnagar and his family members through lease and oral agreements (MS-1, Annexure A-28). Later on, the land belonging to societies have been transferred in the name of Shri V.K.Bhatnagar and family members through declaratory suits namely, compromise suits. In such suits, Shri V.K.Bhatnagar and family members are filing the suits and they are also contesting the suits and by way of compromise, since they are the controllers of societies, the lands have been transferred in their names resulting into substantial gain to the aforesaid persons. In exchange, the interior quality of lands situated at interior villages at Raisina was given to the societies.
8. Investment in shares of Baron Air by the schools/societies can not be termed as an educational activity (MS-1, Annexure A-84).
9. Vehicles of the schools/societies are used by Shri V.K.Bhatnagar and family members.
10. Salary is being paid to Anurag Bhatnagar while he was a student and Vikram Bhatnagar from various schools and societies. Substantial salary of Rs.6.71 lacs 12 is being paid to Smt.Mamta Bhatnagar as a Principal whereas other Principals are getting nominal salaries of Rs.15,000/- p.m.
11. Cash are taken from various schools and societies from various heads and from caution money and other funds and these are diverted for making investment at residential block and commercial projects, namely, Health Care, Health Resorts and Alternative Medicine and to run the poultry farm at Virendra Gram at Gurgaon (MS-10, Annexure A-5).
12. Some of the parties who are genuinely existing denied in their statements that they have not rendered any services or supplied the goods. They were surprised to see their bills. Thus, financial frauds have been done to mis-utilize the society for the personal gain of the founder, Chairman and his family members.
13. Some of the expenses claimed in Income & Expenditure A/c of the society for material never purchased. They are paper bill without physical delivery of goods. Cash has been received from the parties from where bills were procured after deducting their charges. These parties are basically Goodwill Steel Syndicate, Shubham Cement, Puneet Traders, etc. This has been clearly admitted by Goodwill Steel Syndicate. This clearly substantiates the extent the societies were used for personal benefit of the founder chairman.
14. Huge investments have been made for the residence of Shri V.K.Bhatnagar and his family members at Virendra Gram by 13 diverting the funds from schools/societies either through Bhatnagar Foundation or directly from schools/societies.
15. Funds of the schools/societies have been diverted to Health Care, Health Resorts & Alternative Medicine to run the poultry farm at Virendra Gram (MS-10, Annexure A-5).
16. Huge loans and advances from various societies/schools were given to BHR Ltd., BCC(P) Ltd. from caution money account at the time of purchase of these units.
17. Caution money amounting to several Lacs was withdrawn in cash through bearer cheques for the parents who didn't turn up to collect the amount. The cash was taken by the staff and sent to the Central Office, i.e. Shri V.K.Bhatnagar. List of persons with addresses to whom payments have been made, has not been filed for verification.
18. Payments were made from the schools/societies to the consultant of the hotel and receipt were taken for teaching charges in the name of his mother and wife. This was stated by Mr.Anil Sehgal in his statement and copy of the same has already been given to the assessee.
19. From the constitution of the societies, it is again found that the societies are being run by the salaries employees of Shri V.K.Bhatnagar and entire control of all the schools and societies rests only with him. No society is independent for its working and for every work approval is being taken 14 from Shri V.K.Bhatnagar. All these facts are clear from the analysis of seize documents. No minute book/resolution book of the societies are maintained. As mentioned earlier, no proper books of accounts were maintained and only after a gap of about 2 years from the date of search, computerized books were prepared and produced. The fact that the lands owned by the societies worth rupees more than 100 crores (MS-1, Annexure A-80) at Gurgaon have been transferred to Shri V.K.Bhatnagar and his family members in exchange for the lands which have nominal value. This only certifies that the societies are only a tool to claim exemptions and to evade proper taxation. As mentioned earlier, acquisition of crores of assets without any other independent source of income is only a certificate to the fact that the schools were the source of income and were run only for profit and earning income.
20. Shri V.K.Bhatnagar owes loans of Rs.1.01 Crores to the schools but no interest was charged. This substantial amount was utilized for making various investments and in purchase of properties. From the accounts of various schools and societies, it is found that entire assets have been acquired by Shri Bhatnagar and family members by withdrawing funds from schools and societies as there was no other independent source of income. He has himself surrendered an income of Rs.1.01 crores under the VDIS'97 which represented unaccounted cash earned from the schools and service charges claimed as bogus expenses in the schools, investment at Kullu & Manali and other immovable properties. During the search, Shri 15 V.K.Bhatnagar has again surrendered undisclosed income of Rs.50 Lacs which was earned from the schools and the societies have also declared undisclosed income. From the chart of assets owned by Shri V.K.Bhatnagar and his family members and assets declared and donations collected at the time of admission, it is crystal clear that the schools are run only for profit and not for educational activities only and the schools are being shown as being run by the societies only to claim various exemptions."
11. Keeping in view the above allegation made by him as well as the fact that the assessee-society had claimed depreciation in its income and expenditure income, the AO held that the educational institution was being run by the assessee-society clearly with a profit motive and it was, therefore, not entitled for exemption u/s 10(22).
12. Before the learned CIT(A), it was submitted on behalf of the assessee-society that it was running an educational institute viz. St.Vivekanand School and as its receipts were entirely derived from the said school which was being run solely for education purposes and not for the purposes of profit, the entire income earned from the said school was exempt u/s 10(22). It was contended that even if some individual was found to have siphoned off certain funds from the school, the society could not be denied benefit of exemption u/s 10(22). In support of this contention, reliance was placed by the assessee on the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Cosmopolitan Educational Society - 240 ITR
494. It was also pointed out that the SLP filed by the Revenue against the said decision of Hon'ble Rajasthan High Court has been dismissed by the Hon'ble Supreme Court. This submission of the assessee was not found acceptable by the learned CIT(A). According to him, the assessee was obliged to file its return of income for 16 claiming exemption u/s 10(22) as held by the Hon'ble Supreme Court in the case of Aditanar Educational Institution Vs. Addl.CIT - 224 ITR 310 and in the absence of any return of income filed by it regularly for any of the years comprising of the block period, he held that the assessee was not entitled for exemption u/s 10(22). He held that the entire income of the assessee for the said years, on the other hand, was liable to be treated as undisclosed income in the absence of any regular return of income filed by it as rightly done by the AO. He also held that the claim of the assessee for exemption u/s 10(22) in any case could have been considered only in the regular assessments and it was beyond the scope of block assessment under Chapter XIV-B which requires the AO only to compute the undisclosed income as per the provisions contained in the said chapter. He, therefore, upheld the action of the AO in disallowing the claim of the assessee for exemption u/s 10(22)."
13. The learned counsel for the assessee submitted before us that there is no dispute as to the fact that the assessee-society is running an educational institution. He submitted that the said educational institution was existing solely for educational purpose and not for the purpose of profit during the entire block period and therefore, the income of the assessee-society from the educational institution was fully exempt u/s 10(22). He also submitted that as the income of the assessee-society from educational institution was entirely exempt u/s 10(22), it was not required to file the returns of income for the relevant years falling within the block period and this position gets fortified with the amendments made in Section 10(22)/10(23C) whereby the filing of return for claiming such exemption has been made obligatory w.e.f. 1.4.2003. He also submitted that the claim of the assessee for exemption u/s 10(22) was liable to be considered by the authorities below in respect of each assessment year separately. He contended that the orders passed by them in the case of the assessee, however, show that there is no discussion as to for which 17 particular assessment year the society allegedly existed for profit. He submitted that even the allegations/observations made by the AO while denying the claim of the assessee for exemption u/s 10(22) are general in nature and they do not relate to any specific year to arrive at a conclusion that the assessee-society was existing for profit in that particular year. In order to meet the said allegations/observations made by the AO, he made the following submissions in respect of each and every allegation/observation made by the AO in this context:-
"1. The DCIT has simply relied upon the report of DDIT(Inv.) without making any independent enquiry. This act is disregarding the decision of ITAT Madras Bench in case of Kirtilal Kalidas & Co. Vs. DCIT 67 ITD 573.
2. The donations are received for education purpose. This is not a base to consider that the assessee society is running the schools for profit. Use of the funds at Virendra Gram is for development of the common facilities used by the various schools for the educational purpose. The funds were never used for construction of the residential house.
3. The allegation is without any basis. AO has not pointed out any receipt, which is no accounted for rather he has relied on the receipt shown in the books of accounts for taking the surplus.
4. The land has been exchange in execution of the decree of the court. The land so exchanged is used by the society for educational activities without any charge.
5. No share of Baron Air Ltd. is purchased by the assessee society/school.18
6. This observation is without any basis. Even otherwise, the vehicles are used by them only for educational purpose. This has no relevance with the exemption u/s 10(22).
7. The payment of salary has been made according to the scales recommended by the pay commission and no disallowance of such salary was made in the assessment and all these persons are actively engaged in the administration of school/society.
8. These are sheer allegations without any basis. Even the AO has not made any addition to income for such alleged diversion of funds.
9. The AO has not confronted to the assessee society any person who has denied the payment made to them. Payments are mostly by cheques. Bills & vouchers of payment is available. No instance is given where material is shown purchased without delivery of goods.
10. From the balance sheet it can be noted that no such advance are given.
11. Complete details of student wise caution money receipt and payment were filed in assessment proceeding. Not a single instance of caution money withdrawn through bearer cheque was filed.
12. The allegation is without any basis. The assessee has filed the details of the persons managing the society. There is no prohibition that person managing the society and school can't draw salary so long as it is reasonable. The AO has not disputed reasonableness of salary.19
13. These are only memorandum records. This does not affect the claim of exemption u/s 10(22).
14. In course of search also the books of the accounts of the society were found.
15. The observations of the AO are without any basis. No such instances were confronted to the assessee.
16. No loan has been given by the society to Shri V.K.Bhatnagar and his family members. Actual position is that Shri V.K.Bhatnagar has given loan to V B Sansthan and outstanding as on 31.03.1998 is as Rs.52.84 lacs."
14. Relying on the decision of Hon'ble Supreme Court in the case of Aditanar Educational Institution (supra), the learned counsel for the assessee contended that the claim of the assessee for exemption u/s 10(22) is required to be evaluated every year separately and merely because surplus has resulted incidentally from the activity lawfully carried out by the educational institution, it would not cease to be one existing solely for the educational purposes as the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter the object is to make profit. He also placed reliance on the decision of Hon'ble Rajasthan High Court in the case of Cosmopolitan Education Society (supra) wherein it was held that exemption u/s 10(22) could not be denied to the educational society on the ground of misutilization of funds of the society by its members.
15. The learned counsel for the assessee further submitted that a similar issue was involved in the case of Rajender Nagar Education Society belonging to the same group wherein the claim for 20 exemption u/s 10(22) was disallowed by the AO on the basis of similar allegations as made in the present case. In this regard, he invited our attention to the copy of order passed by the Tribunal in the said case dated 29.2.2008 in IT(SS)A.No.34 & 84/Del/2005 placed at page No.335 of his paper book wherein it was held that the claim of the assessee for exemption u/s 10(22) can be considered in the block assessment proceedings as the undisclosed income of the block period is required to be computed in accordance with the provisions of the Income-tax Act, 1961. He pointed out that even the similar allegations made by the AO in that case while denying the exemption u/s 10(22) were elaborately considered by the Tribunal and it was held that the same were not sufficient to deny the claim of the assessee for exemption u/s 10(22). He submitted that it was, however, held by the Tribunal that if some instances are found while dealing with other grounds to show that the assessee did not exist solely for the purpose of education, then it would not be entitled to exemption u/s 10(22) for the relevant year(s). He contended that the Tribunal thus has held in that case that exemption u/s 10(22) has to be considered in the block assessment and only if some instances are found in a particular year to show that the assessee-society did not exist solely for the purpose of education but existed for the purpose of profit, the claim of exemption u/s 10(22) could be denied only in that year(s).
16. The learned DR, on the other hand, submitted that the adverse findings of the search operation conducted in the case of the assessee and the addition made to its undisclosed income on the basis of documents found during the course of the said operation clearly revealed that the assessee-society was running the school not only 21 for educational purpose but the real motive was to earn profit. He submitted that for instance donations were collected by the assessee-society from the parents of the students seeking admission in their school and the donations so collected were not accounted for but were used for the benefit of Shri V.K.Bhatnagar, the key person controlling the entire affairs of the assessee-society. He submitted that the said donations thus were not voluntary contributions but the same were collected forcibly from the parents for giving admissions to their children. He contended that this very fact that the said donations were obtained forcibly outside the books of account clearly show that the motive of the assessee-society behind running the educational institution was to earn profit and as the said amount of donations remained unaccounted for was used for the benefit of an individual, the assessee-society cannot be said to be entitled for exemption u/s 10(22) as rightly held by the authorities below. He also contended that similarly, the other findings of the search operation as well as the post-search enquiries made by the AO clearly revealed that the assessee- society did not exist during the entire block period solely for the education purpose and it existed also for the purpose of profit. In this regard, he invited our attention to the specific findings/observations recorded by the AO at pages 26 to 30 of the assessment order and strongly relied on the same in support of the Revenue's case that the assessee- society was not entitled for exemption u/s 10(22) as claimed by it.
17. We have considered the rival submissions and also perused the relevant material on record. Exemption u/s 10(22) was available upto AY 1998- 99 for income of University or other educational institution existing solely for educational purposes and not for purposes of profit. The claim of the 22 assessee for exemption under the said provisions in respect of its income earned from running of the school made in the block assessment proceedings was disallowed by the AO as, according to him, the school was being run by the assessee-society not solely for educational purposes and there was a profit motive in undertaking the said activity as noticed from the findings of the search operation as well as the post-search enquiries made by him. He has enumerated such findings/observations in the assessment order passed for the block period to support and substantiate his decision disallowing the exemption claimed by the assessee u/s 10(22) and we shall deal with the same separately at the appropriate stage. The learned CIT(A) upheld the said decision of the AO denying the claim of the assessee-society for exemption u/s 10(22) although on a different ground that the said claim could have been considered and allowed in the regular assessments if it was claimed by the assessee- society by filing the returns of income for the relevant years making such claim. He held that the said claim, however, was beyond the scope of block assessment proceedings and even if the said exemption was claimed by the assessee in the block assessment proceedings, the same could not be considered and allowed in the said proceedings. As pointed out by the learned counsel for the assessee at the time of hearing before us, a similar issue had arisen before the Tribunal in the case of Rajinder Nagar Education Society, a society belonging to the same group and vide its order dated 29.2.2008 passed in IT(SS) A.No.34 & 84/Del/2005, it was held by the Tribunal that the income of the assessee-society from running the school having been treated as undisclosed income in the block assessment, it was entitled to claim exemption u/s 10(22) in respect of the said income as the provisions of Section 158BB(1) clearly lay down that undisclosed income for the block period 23 is the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of the Income-tax Act, 1961. Respectfully following the said decision of the Tribunal, we hold that the claim of the assessee-society for exemption u/s 10(22) in respect of income from running the school is liable to be considered on merits in the block assessment proceedings. Accordingly, we now proceed to consider and decide the same on merits.
18. Reverting back to the order of the AO disallowing the claim of the assessee-society for exemption u/s 10(22) holding that the school was not being run by it solely for educational purpose but for the purpose of profit, it is observed that various allegations were made by the AO to support and substantiate his decision on this issue which have already been reproduced by us in paragraph No.10 of this order. At the time of hearing before us, the learned counsel for the assessee has made point-wise submissions in order to meet all these objections raised by the AO which have already been reproduced by us in paragraph No.13 of this order. A perusal of the said submissions vis-à-vis the objections raised by the AO as regards the issue relating to the assessee's claim for exemption u/s 10(22) shows that similar type of allegations were made by the AO even in the case of Rajinder Nagar Education Society while disallowing the assessee's claim in that case for exemption u/s 10(22) and after considering the similar submissions made on behalf of the assessee to meet the said objections, the Tribunal considered and discussed the same point-wise in its order dated 29.2.2008 (supra) as follows:-
"(i) According to the AO the Dy.DIT(Inv.) report page no.481 to 561 and also page no.19 and page 20 was shown to the assessee and the 24 assessee was called upon to rebut immunerable transaction which reflects a diversion of funds for personal benefit and under statement of income by various modes of drawing of funds for personal benefits. The Assessee's contention on the above was that the AO has failed to appreciate the fact that the onus of proof should not be shifted on the assessee merely by relying upon the said report without making fresh and independent enquiries. In our view there are no specific instances with reference to the assessee pointed out by the AO in the Order of Assessment. Such general statements cannot form the basis for drawing any adverse inference against the assessee.
(ii) According to A.O. donations are taken from the parents for admission of their children and no receipts are given for their donations and these are not entered in the books of accounts. The reply of the assessee on the above was that the conclusion is completely baseless, erroneous and unjustified in view of the fact that no donation has been received by the assessee as is evident from the very fact that no addition whatsoever has been made on this ground in the case of the assessee. We are of the view that no special instance has been pointed out by the AO vis-à-vis the assessee.
The general observations in the case of schools controlled by Bhatnagar would not be sufficient to come to any such conclusion.
(iii) In Paras 1, 2 and 3 at page 28 of AO's order there was allegation by the AO that cash was sent from various schools to Mr.Bhatnagar who used them for his individual benefit. All these allegations related to receipt of have no application whatsoever in the case of assessee in view of the fact that no addition whatsoever 25 has been made on this ground in the case of the assessee. The AO has to first consider such donations as income of the assessee and then come to conclusion that income was diverted for personal gains of persons other than the Educational Institutions. No specific instance relating to the Assessee has been pointed out by the A.O.
(iv) In Para 4 at page 28 of the Order of assessment, the AO has alleged costly the cash received for making local and out side Delhi Tours and Trips has not been entered in the books of account whereas expenditure have been debited in a Student Welfare for amount paid to Bhatnagar Hotel & Resorts Ltd. This observation of the AO is totally baseless as the AO has failed to cite any such incidence where any receipt as alleged by the AO has not been recorded by the assessee in its books of accounts. Such general observations not supported by any evidence in our view is not sufficient to draw any adverse inference.
(v) In para 5 at page 28 of assessment order the AO has alleged that cost land of Societies have been transferred to Shri VK Bhatnagar and his family members. No land has been exchanged by the assessee with Bhatnagar as is clear from the observations of the AO at page 12 of his order of assessment giving details of land exchanged by various societies with Bhatnagar. The property of Manav Sthali School, Pusa road, was exchanged and not that of the assessee.
(vi) In para 6 at page 28 of his order, the AO has alleged that the share in Baron Air Ltd., Purchased by Societies/School cannot be considered as educational activities. These 26 observations are not correct because there was no such investment by the assessee. The seized document referred to by the AO in this regard does not pertain to the assessee.
(vii) In para 7 at page 28 of his order the AO has alleged that the vehicle of the school/societies are used by Shri VK Bhatnagar & family. The ld Dy.CIT has made this observation in total disregard of the fact that how the use of the vehicle can affect the genuineness of the claim of exemption u/s 10(22). Even otherwise, this observation is not based on any evidence and is a mere surmise of the AO.
(viii) In para 8 at page 28 of his order, the AO has alleged that the salaries are paid to Shri Vikram Bhatnagar & Anurag Bhatnagar while they were students and also huge salary of Rs. 6.71 lacs p.a. is paid to Smt.Mamta V.Bhatnagar as against normal salary of Rs.
1.90 lacs p.a. (Rs. 15,000/= p.m.) to other employees. According to assessee Shri Vikram Bhatnagar and Sh.Anurag Bhatnagar were not getting salaries from the assessee. Smt. Mamta Bhatnagar, who is the Principal of Manav Sthali School, Rajinder Nagar, an educational institution being run by the assessee society, and which is upto 12th standard. The salaries are being paid to her as per the scales as recommended by the Pay Commission and are at parity to other institutions and are not disallowed in the respective society. In view of the above, we are of the view that no adverse inference can be drawn in this regard against the assessee.
(ix) In Para 1 at page 29 of his order, the AO has alleged that the funds are withdrawn from 27 caution money for payment in Commercial Project like Health Care, Health Resorts & alternative Medicine and Virendra Poultry Farm. The contention of the assessee on this issue was that the contributions towards Common Building at Virendra Gram have been made by different societies and that too through account payee cheques and the payments so made are being duly reflected in the regular books of accounts of respective societies. The further plea of the assessee was that VG is a complex for education purpose and the complete university like complex and this is to be built up with the object stated above.
According to the Assessee, the evidence in support of this submission can also be verified from the seized annexure inventorised as R-1, Annexure A-27. That the assessee has not used facility at Virendra Gram for commercial purpose. In our view observation regarding the investment in Common Building at Virendra Gram from Caution Money is baseless and no evidence as such has been confronted to the assessee for its rebuttal and in any way it could not be a ground for the rejection of claim of exemption u/s 10(22) without proof of profit motive of the assessee.
(x) In Para 2 at page 22 of his order, the AO has alleged that the parties for which expenses are claimed has denied the payment. The basis for the above allegation and the validity of conclusions arrived at by the AO will be dealt with while dealing with ground no.3 and 4 of Revenue's appeal.
(xi) In Para 3 at page 29 of his order, the AO has alleged that some of the expenses claimed in the Income & Expenditure account of the society were for material never purchased and 28 these parties are Goodwill Steel Syndicate, Shubham Cement and Puneet Traders etc. The basis of this allegation will be discussed while dealing with ground no.2 raised by the Revenue.
(xii) In Para 4 at page 29 of his order, the AO has alleged that the huge investments have been made for the residence of Shri V.K.Bhatnagar and his family members at V /G by diverting the funds from schools / societies. This allegation is merely the reproduction of the allegation which the ld.A.O. have already made. The A.O. has not placed any evidence on record in support of such an allegation.
(xiii) In Para 6 at page no.29 of his order, the A.O. has alleged that huge loans and advances from various schools/societies were given to BHR Ltd. And BCC{P) Ltd. From the caution money account. Society has not given either to BHR Ltd. Or BCC(P) Ltd. Any loan.
The allegation is not supported by any evidence whatsoever.
(xiv) In para 7 at page 29 of his order, the AO has alleged that caution money was withdrawn in cash through bearer cheques for the parents who did not turn up to collect the amount. The allegation is completely baseless and unsustainable for the want of any reliable material/ evidence on record in support thereof in the case of the assessee.
(xv) In Para 8 of his order at page 29, the AO has alleged that the payments drawn by Shri Anil Sehgal consultant in the name of mother and wife also. The A.O. while drawing this inference has failed to place on record any evidence in support of this contention. Further 29 more, no such evidence has been confronted to the assessee for its rebuttal and as such, this observation is bad in law.
(xvi) In page no.29 last para and page no.30 first para, there are allegations of misappropriation of funds. So far as the allegations regarding the alleged misappropriation of the funds of the schools/societies by Shri V.K.Bhatnagar and his family members as contained in these paras are concerned, it is seen that these allegations are merely a reproduction of the allegations already made by the ld.A.O. in page nos. 1-19 of the order. The same have already been dealt with hereinbefore. The same is not being reproduced here again. It is pertinent to mention here that the ld.A.O. has merely repeated the same allegations without placing on record any reliable material/ evidence in support thereof.
(xvii) In page no.31, para no. 1 of his order, the ld.A.O. has observed that the exemption u/ s 11 of the Income Tax Act, 1961 is not permissible in case there is infringement of S. 13 of the Act. There is no relevance of referring to S.ll while commenting upon the exemption u/ s 10(22) of the Act, as both the sections are separate and distinct.
(xviii) In page no.31, para no.4, the, A.O. has alleged that by claiming the depreciation, the assessee have admitted that it is running schools for earning business income. That the case law cited by assessee in respect of claim of depreciation are not applicable and there is no Supreme Court or any, High Court decision which directed to allow exemption u/s 10(22). Regarding this observation of the ld.A.O. he 30 has completely failed to appreciate the fact that no investment has been made by the assessee in the Virendra Gram and as such no question of claiming any depreciation, at Virendra Gram as referred by the ld.A.O. arises at all. Even otherwise, claiming of depreciation by an Educational Institution can not adversely affect its claim for exemption u/s 10(22) when the depreciation is very much permissible under the Income Tax Act as there is no prohibition in law."
19. The Tribunal thus examined the submissions made on behalf of the assessee in respect of each objection raised by the Revenue and found on merits that there was no much substance in the objections raised by the AO. The Tribunal, however, hastened to add that if there are some instances which are found while dealing with the issues raised in other grounds to show that the education institution of the assessee-society did not exist solely for the purpose of education but also for the purpose of profit in a particular year/years, then it would not be entitled to claim exemption u/s 10(22) in that year(s). The Tribunal also discussed the legal position in this context as laid down in the various judicial pronouncements and it would be relevant to touch upon these aspects which are relevant to appreciate the concept of educational institution which is existing solely for educational purposes and not for the purposes of profit.
20. In the case of Aditanar Educational Institution Vs. Addl.CIT - 224 ITR 310, it was held by the Hon'ble Supreme Court that where the object of the assessee-society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect 31 funds, donations, gifts etc., colleges and schools are the media through which the assessee imparts education and effectuates its objects. Explaining further, it was observed by the Hon'ble Apex Court that if the sole purpose for which the assessee had come into existence is to impart education at the levels of colleges and schools, such an education society should be regarded as an educational institution coming within Section 10(22). It was further held by the Hon'ble Supreme Court that it would not be possible or proper to lay down in any precise terms as to what would be the income of the educational institution which would qualify for exemption u/s 10(22) and what would be outside the exemption. The answer would depend upon the facts of each case. It was also held that the language of Section 10(22) is plain and clear and the availability of such exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing only for educational purposes since the object is not the one to make profit.
21. A similar issue had also arisen for consideration in the case of Secondary Board of Education Vs. ITO - 86 ITR 408 wherein it was held that the sources of income of an educational institution generally are collection of fees from students, grants given by the government and donations. Such income may, however, be insufficient to cope up with the growing needs when dynamic progress is intended to be made in educational sphere. To supplement such income, the institutions may take recourse to some profit earning business. Such profit would go to the 32 general fund and would be appropriated towards expansion and development of educational schemes taken up by those institutions. In such a case, though incidentally profit is earned to meet the growing needs, all the same the institution exists solely for educational purposes and not for purposes of profit. To the similar effect is the decision of Hon'ble Andhra Pradesh High Court in the case of Governing Body of Rangaraya Medical College Vs. ITO - 117 ITR 284 wherein it was held that merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for the purposes and for the promotion of the objects of the institution. In the case of Educational Institute of American Hotel & Motel Association - 219 ITR 183, Authority for Advance Ruling has held that there can be no doubt that the purpose of making profits is not the real purpose where the articles of association of the institution clearly provide that its net earnings shall not enure to the benefit of any member or director or to any other individual.
22. The proposition propounded in the judicial pronouncements as discussed above makes it abundantly clear that one has to appreciate in the facts of the case of the assessee as to whether in a particular year or years, it existed solely for the educational purpose and not for the purposes of profit. This can appropriately be done as rightly held by the Tribunal in the case of Rajinder Nagar Education Society (supra) on the basis of our decision to be rendered on the various issues involved in the present appeals on merits.
Accordingly, we will revert back to this issue after deciding the other grounds raised in these cross- appeals on merits so that the issue relating to the 33 assessee's claim for exemption u/s 10(22) can be considered in respect of each year forming part of the block period in the light of the findings recorded on merits of the said issues".
11. At the time of hearing, learned counsel for the assessee filed written submissions and placed on record the objections of the Assessing Officer for granting exemption under sec. 10(22) as well as the explanation of assessee in a tabular form. With the assistance of learned representatives, we have gone through the objections as well as explanation of the assessee. We have also gone through the objections of the Assessing Officer in details available on page Nos. 25 to 30 in the assessment order. The objections in summarized form as well as explanation of the assessee placed on record by the learned counsel for the assessee in tabular form reads as under:
S. Allegations of the AO No. Reply by AR a) There are innumerable instances, which The DCIT has simply relied upon the report
reflected a diversion of funds for personal of DDIT (Inv.) without making any benefit and under statement of income by independent enquiry. This act is disregarding way of various modes and drawing of the decision of ITAT Madras Bench in case of income for personal benefits. Kirtilal Kalidas & Co. V. DCIT 67 ITD 573.
b) No receipt is given to parents for The donations are received for education Donation received in cash/cheque/ in kind purpose. This is not a base to consider that the and not entered in the books of accounts assessee society is running the schools for and these amounts are sent for the profit. Use of the funds at Virendra Gram is Individual benefit of Shri V.K. Bhatnagar, for development of the common facilities his family members and his companies used by the various schools for the and for construction of Residential and educational purpose. The funds were never Commercial, Administrative and Sports used for construction of the residential house. Complex at Virendra Gram.
d) The cash received for making local and The allegation is without any basis. AO has out side Delhi Tours and Trips has not not pointed out any receipt, which is not been entered in the books of account accounted for rather he has relied on the whereas expenditure have been debited in receipt shown in the books for accounts for a "Student Welfare" for amount paid to taking the surplus. Bhatnagar Hotel & Resorts Ltd.
e) Shri V K Bhatnagar and family members The land has been exchanged in execution of are filing the suits and they are also the degree of the court. The land so contesting the suits and by way of exchanged is used by the society for 34 compromise, since they are the controllers educational activities without any charge. of societies, the lands have been transferred in their names resulting into substantial gain to the aforesaid persons.
In exchange, the inferior quality of lands situated at interior villages at Raisina was given to the Society.
f) Investment in shares in Baron Air Limited No share of Baron Air Ltd. is purchased by purchased by Societies/School cannot be the assessee society/School. termed as educational activities.
g) The vehicles of the school/societies are This observation is without any basis. Even used by Shri V.K. Bhatnagar & family. otherwise, the vehicles are used by them only for educational purpose. This has no relevance with the exemption u/s 10(22)
h) Salaries are paid to Shri Anurag The payment of salary has not been made is Bhatnagar while he was student and also according to the scales recommended by the huge salary of Rs. 6.71 Lacs per annum is pay commission and no disallowance of such paid to Smt. Mamta V. Bhatnagar as salary was made in the assessment and all against normal salary of Rs. 1.80 Lacs these persons are actively engaged in the p.a. (Rs. 15000.00 per month) to other administration of school/society. employees.
i) Cash is taken from various schools and These are sheer allegations without any basis.
societies from various heads and from Even the AO has not made any addition to caution money and other funds and these income for such alleged diversion of funds. are diverted for making investments in residential blocks and commercial projects, namely Health Care, Health Resorts and Alternative Medicine and to run the poultry farm at Virendra Gram at Gurgaon.
j) Some of the parties who are genuinely The AO has not confronted to the assessee existing denied in their statements that society any person who has denied the they have not rendered any services or payment made to them. Payments are mostly supplied the goods. They were surprised by cheques. Bills & Vouchers of payment is to see their bills. Thus, financial frauds available. No instance is given where material have been done to mis-utilize the is shown purchased without delivery of society's funds for the personal gains of goods. the founder, Chairman and his family members.
35k) The expenses have been claimed in the Income & Expenditure Account of the society for the material, which was never purchased. They are merely the paper bills without physical delivery of goods.
And cash has been received from the parties from where bills were procured after deducting their charges.
l) Huge loans and advances from various From the Balance Sheet it can be noted that societies / schools were given to BHR no such advance are given. Ltd, BCC (P) Ltd. from caution money account at the time of purchase of these units.
m) Caution money was withdrawn in cash Complete details of student wise caution through bearer cheques for the parents money receipt and payment were filed in who didn't turn up to collect the amount. assessment proceeding. Not a single instance The cash was taken by the staff and sent of caution money withdrawn through bearer to Central Office i.e. Shri V K Bhatnagar. cheque was filed. List of the persons with address to whom payments were claim ed has not been filed for verification.
n) From the constitution of the societies, it is The allegation is without any basis. The again found that the societies are bein assessee has filed the details of the persons grun by the salaried employees of Shri V managing the society. There is no prohibition K Bhatnagar and entire control of all the that person managing the society and school schools and societies rests only with him. can't draw salary so long as it is reasonable. No society is independent for its working The AO has not disputed reasonableness of and for every work approval is being salary.
taken from Shri V K Bhatnagar.
o) The resolution/Minutes Book have not These are only memorandum records. This been produced. does not affect the claim of exemption u/s 10(22)
p) No proper books of accounts are being In course of search also the books of the maintained and the computerized books accounts of the society were found. were produced only after a gap of two years from the date of search.
u) The payments drawn by Shri Anil Sehgal The observations of the AO are without any consultant in the name of mother and wife basis. No such instances were confronted to also. the assessee.
w) The loans from societies were taken by No loan has been given by the society to Shri Shri V.K. Bhatnagar amounting to Rs. V.K. Bhatnagar and his family members. 1.01 Crore, on which no interest has been Actual position is that Shri V K Bhatnagar given by him. The entire assets have been has given loan to V B Sansthan and acquired by Shri Bhatnagar and family outstanding as on 31.03.1998 is as Rs. 52.84 members by withdrawing funds from lacs.
schools and societies, as there is no other 36 independent source of income.
On due consideration of the above submissions and respectfully following the decisions of the Co-ordinate Bench wherein one of us (JM) is party, we allow this ground of appeal raised by the assessee for statistical purposes. In principle, we hold that assessee is entitled for exemption under sec.10(22) of the Act in respect of income from running the schools. The Assessing Officer in any particular year is able to find that assessee did not exists solely for the purpose of education, only for that year the claim of exemption under sec. 10(22) can be denied. Assessing Officer is directed to consider exemption under sec. 10(22) individually for each of the years falling in the block period and in case he found that assessee had received any donation outside the books of account and were not used in furtherance of its object of running educational institution or for infrastructure development in any particular year forming part of the block period then with respect to those amounts or year exemption can be denied to the assessee. In the appeals of Nav Manav Sansthan and Rajinder Nagar Education Society, the ITAT has hold that set off of losses in some years against the surplus in other years in the block assessment is to be allowed. The discussion in respect of these issues have been made by the ITAT in the case of Nav Manav Sansthan in paragraph Nos. 40 and 41 which read as under:
40. In ground No.1 of its appeal, the Revenue has challenged the action of the learned CIT(A) in allowing the claim of the assessee for setting of the loss of Rs.67,511/- pertaining to AY 1999-2000 against the surplus of Rs.76,37,924/- shown in the income & expenditure account for the block period.
41. In its income & expenditure prepared for the block period and furnished before the AO, a loss of Rs.67,511/- was shown by the assessee-society for AY 1999-2000 and the same was set off against the income for the other years forming part of the block period. The AO, however, disallowed the claim of the assessee-
society for the said loss on the ground that the assessee 37 having failed to maintain its books of account regularly and also having failed to produce the relevant vouchers, the same was not verifiable. On appeal, the learned CIT(A) allowed the claim of the assessee for the said loss relying on the decision of the Tribunal in the case of B.D.A. Limited Vs. ACIT - 65 ITD 501 wherein it was held that losses of certain years as computed in the block assessment have to be set off against undisclosed income computed in respect of other previous years falling within block period. In the case of Rajinder Nagar Education Society (supra), Delhi Bench of ITAT has also taken a similar view. Moreover, the reason given by the AO to disallow the assessee's claim for loss is also not well founded. On the one hand, he alleges that the books of account were not maintained regularly whereas on the other, he has accepted the figures of surplus reflected in the income and expenditure account prepared by the assessee-society on the basis of its books of account by treating the same as the undisclosed income of the assessee for the block period. It may also be pertinent to note here that even the disallowances of various expenses in the block assessment were made by him with reference to the figures reflected in the income and expenditure account which was admittedly prepared on the basis of books of account of the assessee-society. There was thus a clear contradiction in the stand taken by the AO while disallowing the claim of the assessee for loss which, in our opinion, is not tenable. In that view of the matter, we uphold the impugned order of the learned CIT(A) allowing the claim of the assessee-society for setting off the loss for AY 1999-2000 against surplus of other years in the block assessment and dismiss ground No.1 of the Revenue's appeal.
12. We have gone through the details reproduced by the Assessing Officer on page 13 of the assessment order. We find that in assessment years 1990-91 to 1992-93, there was a deficit in the income and expenditure account. The total loss in these three years is of Rs.5,61,732. Assessing Officer while 38 considering the surplus in the income and expenditure account at Rs.1,17,08,798 has ignored the alleged loss. Though there is no specific ground raised by the assessee in the present appeal for directing the Assessing Officer to allow set off of losses in the one assessment year forming part of the block assessment against the surplus in other years forming part of the block assessment year is to be allowed but we are of the opinion that it is a consequential issue for computing the income of the block period. Therefore, when Assessing Officer will examine the allowability of exemption under sec. 10(22) of the Act, in a particular year, then he shall look into this aspect also. A similar direction has been given by the ITAT in the case of Nav Manav Sansthan as extracted supra, therefore, We direct the Assessing Officer to give same effect in the appeal of the assessee."
11. Respectfully following the Tribunal's order as aforesaid, we restore this matter back to the file of the Assessing Officer to examine the assessee's claim of exemption under sec. 10(22) of the Act in the light of the observations and directions given by the Tribunal in the aforesaid three other cases belonging to the same group. We direct the AO to give the same effect as given in the case of aforesaid three cases in the case of the present assessee also. The AO shall provide reasonable opportunity of being heard to the assessee for the purpose of giving exemption in the light of the decision of the Tribunal in the aforesaid three cases. We direct accordingly.
11A. Ground No.2 is directed against the CIT(A)'s order in confirming the disallowance of depreciation on Virendra Gram Building amounting to Rs.19,53,174/-.
3912. The assessee has claimed investment in some fixed assets. It included the investment in Virendra Gram Building. The gross block of investment in Virendra Gram Building was shown at Rs.77,75,981/-, on which depreciation of Rs.19,53,174/- was claimed. It was found by the AO that the assessee has claimed that the assessee has contributed its share along with other various assessees running educational institutions to a common pool with a view to establish some common facilities such as hostel, swimming pool, gymnasium, play ground etc. The total investment at Virendra Gram Building by all the group societies was claimed to Rs.9.53 crores. The AO rejected the assessee's claim of depreciation by observing that there was no bifurcation to establish ownership as also user of the assets by the assessee.
13. On an appeal, the learned CIT(A) confirmed the AO's action by observing that two conditions for granting depreciation i.e. ownership of the asset and user thereof, have not been satisfied in the present case. Hence, the assessee is in further appeal before us.
14. In the course of hearing of this appeal, the learned counsel for the assessee has submitted that identical disallowance of depreciation on Virendra Gram Building amounting to Rs.19,49,285/- has been made in the case of the other societies owning jointly Virendra Gram Building. The said disallowance was made in the case of St. Vaswani Education Society and 40 also in the case of Nav Manav Sansthan. He further submitted that in the case of co-owners, the matter has been decided in favour of the assessee and therefore, issue may be decided in the light of the decision of Tribunal in the case of Nav Manav Sansthan or in the case of St. Vaswani Education Society.
15. The learned DR merely supported the orders of the authorities below.
16. We have heard both the parties and perused the orders of the authorities below. We have gone through the order of the Tribunal dated 28.05.2010 in the case of St. Vaswani Education Society in IT(SS) A. No.30/Del/2007 with IT(SS) A.No.81/Del/2007 and find that the identical issue has been decided by the Tribunal after following the decision of Tribunal in the case of M/s. Nav Manav Sansthan. The identical issue regarding claim of depreciation on Virendra Gram Building was also involved in the case of M/s. Virendra Bhatnagar Sansthan. ITAT Delhi Bench `I', New Delhi in the case of St. Vaswani Education Society for the block period 1989-90 to 1999-2000 has decided this issue after following the decision of Tribunal in the case of Nav Manav Sansthan as under:-
"13. In ground No.2, the grievance of assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of depreciation on Virender Gram Building amounting to Rs.19,49,285. An identical issue was raised in the appeal of M/s. Nav Manav Sansthan. The facts and circumstances are identical. The assessee is also a contributor and associate of 41 Virender Gram Building. The findings of the ITAT in the case of Nav Manav Sansthan on this issue read as under:
23. Ground No.2 of the assessee's appeal relates to the issue of disallowance made by the AO and confirmed by the learned CIT(A) on account of depreciation claimed on Virendra Gram building.
24. During the block period, the assessee-society had shown to have made investment in the multi purpose project called as Virendra Gram project situated on an area of about 55 acres at Gurgaon on Bye-pass Road.
Originally, the land of this project was owned by various societies including the assessee-society running different schools. The said societies had made an investment of about Rs.10 crores in the said project and the share of the assessee-society in the said investment was to the extent of Rs.1.5 crores. The said project including the infrastructure created thereon which was mainly comprising of different buildings thus was claimed to be jointly owned by the different societies including the assessee and depreciation thereon was claimed in the ratio of respective investment made by the societies on the ground that the said assets were owned by them to the extent of investment made and the same were used for the purpose of their educational activities. This claim of the assessee for depreciation on investment made in the fixed assets in Virendra Gram project was examined by the AO. On such examination, he found that the land of Virendra Gram project originally owned by various societies was later on transferred to Shri V.K.Bhatnagar and his family members by way of declamatory and compromise suits and the ownership of the land on which the Virendra Gram project was set up thus was finally transferred to and vested with Shri V.K.Bhatnagar and his family members. In this regard, it was claimed by the assessee-society that even though the land belonged to Shri V.K.Bhatnagar and his family members, the infrastructure created thereon by making investments by 42 different societies continued to belong to the said societies. This claim of the assessee, however, was not accepted by the AO on the ground that there was no documentary evidence to support and substantiate the same. He also noted that there was no agreement between the concerned societies about sharing of assets in the Virendra Gram project, sharing of other benefits relating to the said project as well as sharing of activities undertaken in the said project. According to him, there was no cogent evidence to establish the use of the Virendra Gram project by the assessee-society for the purpose of its educational activity. He, therefore, held that both the conditions of ownership of assets and use thereof were not satisfied on evidence by the assessee and it was, therefore, not entitled to claim depreciation in respect of assets of Virendra Gram project. The learned CIT(A) upheld the decision of the AO on this issue adopting the same reasons as given by the AO in support thereof.
25. The learned counsel for the assessee submitted that the land for Virendra Gram project was acquired by the different societies including the assessee-society during the period 1980 to 1990 and investment was also made jointly by the said societies in construction of building on the said land. He submitted that the said project comprising of hostel, teachers block, administrative block, conference hall, skating rink, swimming pool etc. was meant for use by the societies for educational purposes and sufficient documentary evidence to establish the said use was produced before the authorities below. He invited our attention to such evidence placed on record and submitted that no specific reason has been given either by the AO or by the learned CIT(A) to dispute the use of the assets at Virendra Gram project by the assessee-society for its educational activities. He submitted that the total investment made by the different societies in the said project upto the date of search was shown at Rs.9.99 crores and when the matter was referred by the AO to the DVO, the value of 43 construction was determined by him at Rs.9.65 crores. He submitted that no doubt the land of the said project was transferred to Shri V.K.Bhatnagar and his family members in exchange of other land owned by them vide a declaratory suit as per the decision of the Court on 30.1.1998, the construction as well as other facilities developed on the said land remained the property of the societies. He contended that both the conditions of ownership as well as use of the assets at Virendra Gram project thus were satisfied in the case of the assessee- society and it was entitled for depreciation thereon as claimed. He also submitted that year-wise details of the investment made by different societies including the assessee-society in the Virendra Gram project were furnished before the AO. In this context, he invited our attention to the said details furnished in his paper book. He also invited our attention to the provisions of Section 32 to point out that depreciation is allowable even if the relevant asset is partly owned by the assessee. Relying on the decision of Hon'ble Kerala High Court in the case of Prathas Trust - 249 ITR 120, he submitted that property may belong to one person and the structure may belong to another person. He also relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Poddar Cement Pvt.Ltd. - 226 ITR 625 wherein it was held that owner of the property is a person who is entitled to receive income from the said property in his own right. He further relied on the decision of the Tribunal rendered in the case of St.Vasvani Education Society vide an order dated 28.9.2004 in ITA No.1199/Del/2004 [copy at paper book page 335 (77 & 78)] and submitted that the claim of the assessee in that case for depreciation in the similar facts and circumstances was allowed by the Tribunal.
26. The learned DR, on the other hand, strongly supported the orders of the authorities below on this issue disallowing the claim of the assessee for depreciation on assets at Virendra Gram project. He contended that the use of the assets by the assessee-
44society for its education activity of the said assets as well as ownership thereof was not satisfactorily established as rightly held by the authorities below. He also contended that unless both these conditions are satisfied by the assessee-society, it cannot be allowed depreciation on the assets at Virendra Gram. Referring to the relevant portions of the orders of the authorities below, he submitted that even the relevant details of the share of investment made by the assessee-society in the Virendra Gram project were not furnished to support and substantiate its claim for depreciation thereon.
27. We have considered the rival submissions and also perused the relevant material on record. It is observed that the claim of the assessee-society for depreciation on assets forming part of infrastructure of Virendra Gram project was disallowed by the AO as well as by the learned CIT(A) on the ground that both the conditions for allowing the said claim viz. ownership of the said assets as well as the use thereof were not satisfied in the case of the assessee. It was also held by the authorities below that the relevant details of the investment made in the said assets as well as the basis for the exact share of the assessee-society in the said assets jointly owned by various societies were not given. Before we come to the issue of satisfaction of the two conditions for allowing the claim of the assessee for depreciation i.e. ownership and user of the assets, we may note that all the relevant details of the investment made by the assessee-society alongwith other societies were furnished by it during the course of block assessment proceedings itself as pointed out by the learned counsel for the assessee. In fact, in the case of V.B.Sansthan, the copies of all the bills of the contractors running into 2,562 pages were submitted before the AO vide a letter dated 15.5.2002 and a consolidated chart of the investment made in the Virendra Gram project and the contributions by the various societies was also prepared and furnished. As per the said summary, total investment made by different societies in the said project upto the date of 45 search was shown at Rs.9.99 crores and in order to ascertain the correctness of the said claim, even a reference was also made by the AO to the DVO who valued the said assets comprising mainly the construction work at Rs.9.65 crores. It clearly shows that not only the required details of the investment made in Virendra Gram project were furnished by the assessee-society but the same were also verified by the AO. As far as the share of different societies in the ownership of the said assets is concerned, it was claimed that the same was agreed to be taken in the ratio of contribution of funds made by each society and there being no dispute amongst the different societies for adoption of the said basis, there was no reason for not accepting the said basis.
28. Reverting back to the use of the infrastructure facilities/assets of Virendra Gram project for the purpose of its activities by the assessee-society, the evidence in the form of photographs showing various activities and competitions held in the Virendra Gram project was placed on record by the assessee-society. A copy of report of Virendra Gram project is also placed on record explaining therein the rationale behind development of the said project, the relevant portion of which is reproduced below:-
"The educational complex of 'Virendra Gram' is an unique campus of general education, sports, agricultural and environmental sciences upto higher secondary level, which is being established in the periphery of Delhi on Mehrauli-Gurgaon Road, in village Sikanderpur, only at a distance of 7 Kms. From Mehrauli by Virendra Bhatnagar Sansthan - a registered society under "Societies Registration Act 1860." It will be one of the prestigious educational institutions of India, catering the need of various convent schools of metropolitan city of Delhi as well as of its surrounding states by providing peaceful, healthier 46 & rural environment to their students which is hardly available in the schools located in congested areas of the capital.
Firstly, the origin of the above educational complex of 'Virendra Gram' is the result of an exciting but silent revolution for 'Better English Medium Convent Education' which has started recently particularly in all urban areas of India as there is a craze among urban parents for educating their children in English Medium Convent Schools. In these days the above revolution is at peak in the Metropolitan city of New Delhi which resulted in heavy rush of enrolment of new students in all our Seven Public Schools (the detail of schools is described hereinafter) run by 'Virendra Bhatnagar Sansthan' and its allied societies. Secondly the reputation of our above educational institutions due to remarkable results (generally more than 60 percent students of our public schools got distinctions at all India level in every year) have also become an attraction for the brilliant students of the country again resulting into heavy rush of students and hence origin of 'Virendra Gram'. The above tendency of increasing strength of students caused scarcity of buildings, play grounds and other educational facilities in our already existing seven public schools located at New Delhi.
Realizing the above problems, seven educational organizations of New Delhi i.e. (1) Manav Shiksha Samiti New Delhi. (2) Rajendra Nagar Education Society New Delhi. (3) V.B.Sansthan New Delhi (4) St.Wasvani Education Society New Delhi. (5) Nav Manav Sansthan New Delhi. (6) Arya Bhatt Vidya Sansthan New Delhi. (7) Laxmi Bai Foundation, New Delhi, adopted a resolution on 1st March, 1979 (Annexure-I) for jointly 47 purchasing an area of about 100 acres on Delhi-
Haryana border for the establishment of an educational institution based on natural environment named 'Virendra Gram'. In the resolution it was also decided that the above educational institution will be run by 'Virendra Bhatnagar Sansthan' formed jointly by the above seven educational organizations. It is worth mentioning here that as mentioned in the resolution dated 1st March, 1989, the above mentioned educational organization are running seven public schools in New Delhi i.e. Manav Sthali School, New Rajendra Nagar, New Delhi (run by Rajendra Nagar Education Society), Manav Sthali School, Pusa Road, New Delhi (run by Manav Shiksha Samiti), Manav Sthali School, South Extension, New Delhi (run by St.Wasvani Education Society), South Town School, South Extension, New Delhi (run by Arya Bhatt Vidya Sansthan), Convent of Rani Jhansi, R.K.Puram, New Delhi (run by Laxmi Bai Foundation), St.Viveka Nand School, East Patel Nagar, New Delhi (run by Nav Manav Sansthan) and Manav Sthali Schook, Double Storey, New Rajendra Nagar, New Delhi (run by Manav Shiksha Samiti).
All these schools are located in congested areas where there is no scope of expansion and thereby all the above educational organizations decided to have a big educational institution having adequate spaces for all teaching blocks, recreational facilities, students & staff accommodation and adequate land where students may be taught about cultivation, agriculture, poulting farming, cattle farming, fruit culture etc. as well as adequate spaces for all modern games.
Also it was decided that there was a need to introduce environmental education among the 48 urban students (students of the institution) which should include the study of all environmental elements such as climate, earth, plants, animals and their natural eco-system as well as studies of interdependence of these elements from primary levels. The practical knowledge of all environmental elements is of great importance to the students of primary level as environmental problems are increasing day by day and the Government is also keen in introducing such subjects to the students of primary level. In addition to this, 'Virendra Gram' will also introduce the rural way of life and rural occupations such as agriculture, poultry farming, cattle farming, fruit culture etc. as students of urban areas know nothing about the above rural occupations which are of great importance for the survival of mankind.
Thus, 'Virendra Gram' shall function as a training centre for all students of the schools run by above educational organization. The students of above mentioned schools shall take training in the 'Virendra Gram' in rotation i.e. society wise or age wise. With the establishment of 'Virendra Gram' the problems of all above schools will be solved."
29. The objectives of the Virendra Gram project were also enumerated in the aforesaid report wherein it was clearly indicated that the said project was being established for solving the problems of scarcity of land and buildings of the seven schools of the participatory societies including St.Vivekanand School of the assessee- society. In order to ascertain the participation of the students of the school of the assessee-society in the said activities, we directed the learned counsel for the assessee during the course of appellate proceedings before us to file the supporting documentary evidence, if 49 any. In this regard, he has filed a copy of school news bulletin viz. 'Manav Mirror' published in March, 1995 which shows that interschool skating championship was organized at Virendra Gram project and the students of Vivekanand School run by the assessee-society had participated in the said competition. It also shows that annual function of the different schools including the school run by the assessee-society was held in Virendra Gram project. Keeping in view this evidence placed on record by the assessee and having regard to the fact that huge investment was admittedly made by the assessee- society to create the infrastructure facilities to facilitate different school activities, we are of the view that the assessee-society has duly established its claim that the infrastructure created at Virendra Gram project was used for its activity of running a school and the authorities below were not justified in holding that such use was not satisfactorily established by the assessee.
30. As regards the ownership of the assets of Virendra Gram project, it is observed that the land on which the said project was developed had been initially purchased and owned by the assessee-society jointly with other societies. This being the undisputed position and keeping in view that the factum and quantum of investment made by the assessee-society in creation of infrastructure on the said land was accepted even by the AO after having got the said investment valued from the DVO, we are of the view that the ownership of the assets forming part of the said infrastructure to the extent of its share as determined on the basis of contribution of funds made has to be taken as duly established. The AO as well as the learned CIT(A), however, has disputed the same mainly on the ground that the land belonging to the assessee-society on which Virendra Gram project had been developed was subsequently transferred to Shri V.K.Bhatnagar and his family members in exchange of some other land and it had thus no more remained the owner of the land or even the infrastructure created 50 thereon. After having noted that the said exchange of land was effected by way of a declaratory suit, the learned counsel for the assessee was directed by us to file the copies of relevant plaint and compromise decrees through which the land of the society was exchanged with land of Shri V.K.Bhatnagar and his family members. A perusal of the said documents placed by him on record shows that the land belonging to the society was actually exchanged only in the month of January, 1998 and the assessee-society thus had ceased to be the owner of the said land on which Virendra Gram project was developed thereafter. It follows that the assessee-society continued to remain the owner of the said land upto the end of the previous year relevant to AY 1997-98 and this being so, the ownership of the assets comprising the infrastructure created on the said land belonging to it could not be questioned on the basis of exchange of land which had taken place only in the previous year relevant to AY 1998-99. As regards the claim of the assessee- society for depreciation on the said assets for and from AY 1998-99, the plea taken by the learned counsel for the assessee before the authorities below as well as before us has been that even though the land of the Virendra Gram project was transferred to Shri Virender Bhatnagar and his family members in January, 1998 in exchange of some other land, the ownership of the assets comprising infrastructure created on the said land continued to remain with the various societies including the assessee- society in the ratio of investment made therein. It is no doubt true that the concept of dual ownership is recognized by law in India and as held by the Hon'ble Kerala High Court in the case of CIT Vs. Pratasth Trust
- 249 ITR 120 cited by the learned counsel for the assessee, the land property may belong to one person and the structure thereon may belong to another person. However, the onus to establish that there was such a dual ownership in existence has to be established by the assessee claiming the same on the facts of each case as well as the evidence in support thereof. In the present case, the orders of the authorities below show that this 51 exercise was not specifically done inasmuch as the assessee was not called upon to establish his case. We, therefore, find it fair and proper and in the interest of justice to restore this issue to the file of the Assessing Officer with a direction to allow an opportunity to the assessee to establish its claim that even after transfer of its land in January, 1998, the ownership of the assets comprising infrastructure created on the said land continued to be with it. Accordingly, the claim of the assessee for depreciation on assets of Virendra Gram project is allowed upto AY 1997-98 whereas the issue relating to its claim for the said depreciation for AY 1998-99 and onwards is restored to the file of the AO for deciding the same afresh as per the direction given above".
14. With the assistance of learned representatives, we have gone through the record carefully. The assessee has contributed its share along with various other societies running educational institution to a common pool with a view to establish some common facilities such as hostel, swimming pool, gymnastics, play ground etc. The assessee has claimed depreciation on the basis of investment made by it. This claim has been disallowed to the assessee. An identical investment was made to by other societies to the common pool and the depreciation has been allowed to those societies as discernible from the findings recorded by the ITAT in the case of Nav Manav Sansthan, extracted supra. Respectfully following the order of the ITAT in the case of Nav Manav Sansthan, we allow this ground of appeal and direct the Assessing Officer to allow the depreciation to the assessee."
17. Respectfully following the aforesaid order of the Tribunal in the case of St. Vaswani Education Society, where the earlier order of the Tribunal in the case of Nav Manav Sansthan was followed, we allow this ground of 52 appeal filed by the assessee and direct the AO to allow depreciation to the present assessee also.
18. Ground No.3 is directed against the CIT(A)'s order in confirming the disallowance to the extent of Rs.13,61,765/- made out of transport expenses.
This ground is connected to ground No.2 of the departmental appeal where the department has taken a ground that the CIT(A) has erred in reducing the addition from Rs.23,00,000/- to Rs.13,61,765/- made under the head "Transport Expenses".
19. In the assessment, it has been observed by the AO that against receipt of Rs.1.15 crore, expenses claimed were of Rs.1.26 crore, and thus, the assessee claimed loss in its activity. The AO further stated that the expenditure was not supported by work order, agreement and other evidences for payment, and most of the payments were made by cash/bearer cheques. The AO also made a reference to the enquiries conducted by DDIT, Investigation where more than 50 parties were claimed to be bogus.
The AO observed that expenses relating to these parties were of Rs.22,11,765/-. The AO, therefore, made lump sum disallowance of Rs.23,00,000/-. In a regular assessment for Assessment Year 1998-99 and 1999-2000, the AO also made disallowance of Rs.3.5 lakhs and Rs.5 lakhs under this head.
5320. On an appeal, the learned CIT(A) restricted the disallowance to Rs.13,61,765/- and deleted the balance out of the total disallowance of Rs.23,00,000/-.
21. Hence, both the assessee and the revenue are in appeal before us.
22. The learned counsel for the assessee has submitted that the assessee society was providing transport and refreshment facility to its students on no profit no loss basis. He pointed out that Investigation Wing of the Department conducted enquiries in respect of the payments made on account of transport and refreshment expenses by various societies belonging to the same group, where they had taken a view that 65 parties were bogus. On that basis, the AO held that the payment to the extent of Rs.22.12 lakhs made by the assessee was paid to the bogus parties. It was submitted by the learned counsel for the assessee that the AO's observation was not correct inasmuch as there was no bogus payment of the expenses made by the assessee society. He further submitted that the AO assumed bogus payment simply for the reason that the summons issued to 50 parties were returned unserved and therefore, he considered them to be non-existent. It was clarified by the learned counsel for the assessee that out of 50 parties whom the summons were issued but returned un-served, the assessee society was dealing only with 18 parties and amount paid to them during the block 54 period was only Rs.22,11,765/-, which included the payment of Rs.1,90,694/- and Rs.2,52,489/- pertaining to the period relevant to the Assessment Years 1998-99 and 1999-2000, where the separate disallowance has already been made in the regular assessment. He further pointed out that during the assessment proceedings, the assessee filed copies of account of the parties to whom the payment of Rs.22,11,765/- was made and from the details, it will be revealed that most of the payments made by cheque, were verified by the AO. He further submitted that simply because summons were returned un-served, it can not lead to the assumption that the parties were non-existent. He, therefore, submitted that when the assessee society had produced all bills/vouchers of these parties, payments to most of them were made by cheques, and no incriminating material was found in the course of search to indicate that the payments made to those parties were bogus and the money were returned back to the assessee, no disallowance on account of payment of transport expenses was called for. It was further pointed out that out of total 65 parties considered by Investigation Wing as non-verifiable, the present assessee society had no dealing with 47 parties but the dealing were only with 18 parties, and the amounts paid to these parties in cash and by cheques were as under:-
(1) Payments by cheque - Rs.17,30,216/-
(2) Payment in cash - Rs. 4,81,549/-
55
23. In the light of the aforesaid submission, it was pointed out by the assessee that the entire disallowance made by the AO is unjustified.
24. The learned DR on the other hand, supported the order of the Assessing Officer.
25. We have heard both the parties. It is an admitted position that the total payment made to 18 parties out of 65 parties, were only of Rs.22,11,765/-. The AO disallowed the sum of Rs.23 lakh in the block assessment and a further sum of Rs.5 lakh and Rs.3.5 lakh in the regular assessment for the Assessment Years 1998-99 and 1999-2000. Therefore, the AO adopted the gross total figure of Rs.31.50 lakhs as against actual payment of Rs.22,11,765/- made to 18 parties out of 65 parties in respect of which Investigation was made by the Investigation Wing. We, therefore, find that the CIT(A) has rightly held that he found merit in the argument of the learned Authorized Representative for the assessee that there was no basis for the AO to adopt figure of Rs.31.50 lakhs when he himself has observed in the impugned order that amount of payment made to 18 parties alleged to be bogus was Rs.22,11,765/-. It was also found by the learned CIT(A) that out of Rs.22,11,765/-, an amount of Rs.17,30,216/- was paid by cheques and only an amount of Rs.4,81,549/- was paid in cash. It is not in dispute that none of these parties whom the payments were made to the 56 extent of Rs.22,11,765/- had not responded to the enquiries made by the AO.
However, the assessee has been able to establish that out of Rs.22,11,765/-, an amount of Rs.17,30,216/- was paid by cheques. The learned DR has not been able to show any material to the contrary to say that the amount of Rs.17,30,216/- was not paid by cheque. Therefore, the addition to the extent of Rs.17,30,216/- is unjustified. This leaves us to consider the payment of Rs.4,81,549/- paid in cash for the purpose of disallowance. As already observed above, the AO has already made addition of Rs.8.5 lakhs i.e. Rs.
3.5 lakhs in Assessment Year 1998-99 and Rs.5 lakhs in Assessment Year 1999-2000 in the regular assessment, in respect of which, the appeals are also pending before us. We are of the view that no addition in this block assessment is called for inasmuch as no material during the course of the search was found to indicate and establish that the amount paid to these parties either by cheque or in cash, was bogus. Therefore, whole of the addition of Rs.23 lakhs made by the AO in this block assessment stands deleted. However, disallwoacne of Rs.3.5 lakh in Assessment Year 1998-99 and Rs.5 lakh in Assessment Year 1999-2000 shall be considered in the appeals pertaining to regular assessment of those Assessment Years.
57IT(SS)A. No.80/Del/2005
26. Now we come to the appeal filed by the department.
27. Ground No.1 is directed against the CIT(A)'s order in deleting the addition of Rs.12,62,045/- on the following accounts:-
(1) On account of bills of Rs.54,045/- (2) Addition on account of seized document amounting to Rs.65,000/-. (3) Addition of Rs.11,43,000/- on the basis of seized documents of Annexure A-5 Pages 49 to 57 & 107 to 128.
28. The AO made the addition of Rs.12,62,045/- on the basis of seized documents. The AO considered the seized document No. MR-1, Annexure AA-47, MS-10 Annexure A-2 and Annexure A-5. The amount of Rs.54,045/- was related to the bills of M/s. Bharat Marble House for supply of marble at Virendra Gram for Rs.34,845/- and Rs.40,200/-. The assessee claimed that these payments were dully accounted for in the books of account. The AO took the view that this payment could not be qualified to be revenue expenditure and hence, the same could not be allowed as deduction as it represented capital expenditure. The assessee submitted that all the expenses were accounted for in the books of account and the question whether it is capital or revenue, is not relevant for determining the undisclosed income for the block assessment.
5829. The addition of Rs.65,000/- is based on a seized account of a book seller, one Mr. Julka against whose name a sum of Rs.65,000/- was noted to have been paid, out of which Rs.55,000/- stood paid upto 31.12.1988. The assessee explained before the AO that this document was related to the book seller who provided the facility of selling all books at the school premises for the convenience of the students and this was not related to the assessee's activities. However, the AO treated the document to be that of the assessee and made the addition on account of payment of Rs.65,000/- as per seized document.
30. The next addition of Rs.11,43,000/- based on the seized document Annexure A-5 pages 49-57 and 107-108. The AO noted that these documents contained details of cash receipts, cash expenses, cheques received and cheque payment of Poultry farming of Virendra Gram. The AO further noted that the aforesaid amount was received by the assessee's school during the period January, 1997 to December, 1998 as also a sum of Rs.17,29,293/- received from Virendra Poultry Farming of different branches of Manav Sthali School. The AO treated the same to be an income of the assessee. The assessee claimed that the seized documents did not belong to the assessee and were on account of Virendra Poultry Farming, which was a proprietary concern of Shri Virendra Kumar Bhatnagar in 59 whose case these receipts have already been considered. However, this explanation of the assessee was rejected by the AO.
31. On an appeal, the learned CIT(A) deleted the aforesaid three additions by observing and holding as under:-
"I have heard the learned A.R. and have seen the relevant record. I agree with the learned A.R. that for the purpose of Chapter XIV-B what is required to be determined is whether there is any expenditure or income for which evidence is found during the course of search and for which there is no entry in the books of accounts or which is not disclosed by the assessee. The two bills in question are undisputedly accounted for in appellant's books of account and there is no material which could enable the Assessing Officer to treat the such bills as undisclosed income of the appellant. Therefore agreeing with the learned A.R. I delete the addition of Rs.54,045/-.
Xx xx xx xx xx xx xx xx
Xx xx xx xx xx xx xx xx
I have heard the learned A.R. and seen the relevant record. Admitedly document in question records the name of Mr. Julka. The ownership of this document is denied by the appellant. The Assessing Officer at his own has one nothing to substantiate his finding that the document did not belong to Mr. Julka but to the appellant. In my view this reasoning adopted by the Assessing Officer in treating the amount as undisclosed income is untenable, since the evidence found did not definitely point to any activity of the appellant with regard to purchase sale of books to students. This addition is deleted.
Xx xx xx xx xx xx xx xx
Xx xx xx xx xx xx xx xx
60
I have considered the arguments of the learned A.R. and have also perused the material on record. The seized Annexure A-5 does not show any reference to either the appellant Society or to the school run by it. It appears to be an account of receipts and payments of a Poultry Farm as various expenses like, Choker, Diesel, medicine, Gur, Bhusa etc. are found recorded and similarly various receipts like egg sale, mandi sale, milk sale, khal sale etc. are also found recorded. This itself shows that these documents do not belong to the appellant society at all and the Assessing Officer has not brought on record any basis to show that the amount of Rs.11.43 lacs pertains to the appellant society. In these circumstances no addition can be justified made in the hands of the appellant society on account of these seized document. The same is deleted. Relief Rs.11.43 Lacs."
32. We have heard both the parties and considered the orders of the authorities below. It is not in dispute that the expenses of Rs.54,045/- have been duly shown in the books of account. It is not the case where these expenses were incurred outside the books of account. The question whether these expenditures are to be construed as revenue expenditure or capital expenditure, is not a matter to be considered in the block assessment without there being any material found during the course of search that the expenditure claimed by the assessee was false and not admissible. The learned CIT(A) has rightly deleted the addition of Rs.54,045/- and his order is accordingly upheld. With regard to the addition of Rs.65,000/-, we find that the CIT(A) has given a finding that the document in question mentions the name of Mr.Julka. The AO has not done anything to prove and establish 61 that whatever mentioned in the seized document was actually belonging to the assessee. The assessee has given an explanation that this document belonged to Mr. Julka, a book seller, who was providing facility to the students to purchase the books. In the light of these reasons, the learned CIT(A) has rightly deleted the addition of Rs.65,000/-. With regard to the addition of Rs.11,43,000/- based on seized documents Annexure A-5 Pages 49-57 and 107-108, the assessee has claimed that these documents do not belong to the present assessee. In the assessment order, the AO has stated that cash are taken from various schools and societies from various heads and from caution money and other funds and these are diverted for making investment at residential block and commercial projects namely, Health Care, Health Resorts and Alternative Medicine and to run the poultry farm at Virendra Gram at Gurgaon by giving reference to the seized document MS-
10, Annexure A-5. He further stated that funds of schools and societies have been diverted to health care, health resorts and alternative medicine and to run the poultry farming at the Virendra Gram. The AO further stated that pages 49-57 and 107-128 are the details of cash received, cash expenses, cheque received, cheque expenses of poultry farming at Virendra Gram and a sum of rs.11,43,000/- was received by Convent of Rani Jhansi School (CRJ) during the period from January, 1997 to December, 1998 as also a 62 sum of Rs.17,29,293/- being received by Virendra Poultry Farm from different Manav Sthali Schools. It was submitted by the assessee that all these documents are related to Virendra Poultry Farm being a proprietary concern of Shri Virendra Kumar Bhatnagar, in whose case the amount has already been considered. With regard to the payment made by CRJ to Virendra Poultry Farm during the period from January, 1997 to December, 1998, it was contended by the assessee that these payments represented the total sum received from different schools on account of horse feed expenses and the amounts so received were ultimately paid to the Virendra Poultry Farm. The aforesaid payment of horse feed expenses was duly reflected in the books of account of the respective schools. However, the AO made this addition in the hands of the assessee by observing that the assessee has failed to substantiate cash receipts in the books of account. In this connection, a copy of order dated 8.04.2008 passed by ITAT, Delhi Bench `E', New Delhi in the case of Shri V.K. Bhatnagar [IT(SS) No.141/Del/05 with IT(SS) No.175/D/05] has been placed before us, where addition in respect of these seized documents has been considered in the hands of Shri V.K. Bhatnagar, where the addition to the extent of Rs.3 lakhs made by the AO has been sustained by the Tribunal by observing and holding as under:-
"9.2 The ground no.2 is regarding addition of Rs.3 lacs on account of Virender Poultry Products 63 Farms. The seized document showed that the bank account had been opened in this proprietary concern on 1.10.1994 and closed on 19.7.1999. As per MS-10, annexure A-5, page 49-57, 107 & 128 cash amounting to Rs.11.43 lacs was received between 6.6.1997 to Dec 1998 from CRJ. Similarly, payment of Rs.17.29 lacs had been received from various schools between 7.1.1997 to 2.11.1998. The seized document also showed that the eggs were supplied to restaurants at South Extension. Though the payments were made to poultry farm, no evidence of supply of eggs such as bills/ vouchers were found. The assessee also did not file details of investment, yearly receipts and yearly expenses and other details, from which income could be computed. In the absence of details the A.O. estimated the income at Rs.3 lacs. In appeal, CIT(A) deleted the addition after observing that the same had been made on the basis of guess work. Before us, the Ld. A.R. for the assessee agreed that the document showed supply of eggs between 94-99. The business was closed, as it was not found viable. There was no income earned. The addition made by the A.O. was not based on any material found during search and therefore, order of CIT(A) deleting the addition was justified. Ld. Sr. DR on the other hand argued that the transactions were not denied. It was also submitted that the seized documents showed receipt of substantial amounts and the assessee must have also made investment in the business, details of which were not given. The addition made was therefore, legally in order.
9.2.1, We have perused the records and considered the matter carefully. There is no dispute that the assessee was running the poultry farm during 1994-99 and supplied eggs to various parties. The seized documents also showed that the cash to tune of Rs.11.43 lacs and Rs.17.29 lacs had been 64 received from Jan 1997-Dec 1998. The assessee could not give details of investment in this business as well as yearly receipt and expenses and this fact is also not disputed. Therefore, on he basis of material found, the A.O. is entitled to estimate income for the entire period. Considering the receipt of money amounting to about Rs.28 lacs during the two year period from Jan 1997 to Dec. 1998 and the fact that some investment is definitely required for starting the business, the estimate of income on these accounts to the tune of Rs.3 lacs for the entire period from 1994-99 is justified. The order of CIT(A), therefore, cannot be sustained. The same is reversed and the addition made is confirmed."
33. In the light of the aforesaid facts, we therefore, uphold the order of the CIT(A) in deleting the addition inasmuch as the assessee has been able to explain the amount received from different schools and paid to Virendra Poultry Farm, and undisclosed income arising therefrom has been considered in the case of Shri V.K. Bhatnagar, proprietor of Virendra Poultry Farm. The order of the learned CIT(A) is thus upheld.
34. Ground No.2 against the CIT(A)'s order in reducing the addition from Rs.23 lakhs to Rs.13,61,075/- on account of transport expenses, has already been decided along with identical ground raised by the assessee in the assessee's appeal hereinabove.
35. Ground No.3 is directed against the CIT(A)'s order in deleting the addition of Rs.10 lakh made on account of bogus expenses other than 65 transport and refreshment expenses. The lump sum disallowance of Rs.10 lakh has been made by the AO by way of disallowance out of professional charges, diesel and petrol expenses, repair & maintenance expenses and printing & stationery expenses. The AO disallowed the same for the reason that substantial expenses were claimed by the assessee under these heads and they were found to be unverifiable as the assessee did not file evidence of these expenses and had also not furnished the details of payment made in respect of such expenses. The AO noted that in certain cases vouchers were not signed by the Principal and there was no authorization by the Principal for such payments. The AO also noted that some disallowance has already been made by him in the regular assessment for Assessment Years 1998-99 and 1999-2000 and a further addition of Rs.10 lakh is made in the block assessment.
36. On an appeal, the learned CIT(A) deleted the addition by observing that there was no material or evidence on record either found during the course of search or brought on record during block assessment proceedings relating to seized documents on the basis of which, it could be said that expenses incurred by the assessee under various heads of accounts are bogus expenses or that the payment has flown back to the appellant society.
However, the learned CIT(A) further observed that in the case of block 66 assessment where only undisclosed income based on seized document can only be determined and included in the block assessment. The learned CIT(A) therefore, held that the aforesaid addition of Rs.10 lakh was beyond the scope of provisions of Chapter XIV-B of the Act.
37. We have heard both the parties and perused the material on record. It is not in dispute that the AO has disallowed the sum of Rs.10 lakh on lump sum by saying that the expenses were not found to be verifiable. The AO started examining the expenses in the course of the block assessment proceedings. However, he has not pointed out any document or material or evidence found during the course of search to indicate and establish that any part of these expenses was bogus. The learned CIT(A) has rightly held that in absence of any seized evidence, the disallowance of expenses in a routine manner was beyond the scope of block assessment within Chapter XIV-B of the Act. At this stage, it is pertinent to note that identical disallowances were made in the cases of Rajinder Nagar Education Society, Nav Manav Sansthan and Virendra Bhatnagar Sansthan and in those three cases, the Tribunal has deleted the addition by holding that such disallowances are not permissible in the block assessment without referring to any specific seized material found during the course of search. The decisions of the Tribunal in the case of Rajendra Nagar Education Society have also been followed by 67 the Tribunal in the case of St. Vaswani Education Society. Respectfully following the Tribunal's orders in the connected cases of this group, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition of Rs.10,00,000/- being disallowance on ad hoc basis out of various expenses.
38. Ground No.4 is directed against the CIT(A)'s order in deleting the addition of Rs.4,75,000/- made on account of contribution to Vasant Kunj Building.
39. The AO made the addition of Rs.4,75,000/- for the reason that there was no justification on the part of the assessee to make a contribution of Rs.4.75 lakhs for construction of building at Vasant Kunj.
40. On an appeal, the learned CIT(A) deleted the addition of Rs.4.75 lakhs by observing that it was not in dispute that the payments were duly recorded in the books of account of the assessee society. It was also not in dispute that the payments were made for construction of school building by Bhatnagar International School Vasant Kunj. The learned CIT(A) found that the contribution so made was wholly and exclusively for spread of education and the amount was utilized for educational activities. The learned CIT(A) further observed that no material was found during the course of search on the basis of which, it could be said that such contribution was not made for 68 the purposes of spread of education. The learned CIT(A) relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Delhi Kannada Education Society, reported in 246 ITR 731.
41. We have heard both the parties and perused the material on record. In the course of hearing, it has been pointed out by the learned counsel for the assessee that similar contribution was disallowed in the block assessment proceedings in the cases of Nav Manav Sansthan and Virendra Bhatnagar Sansthan in the block assessments made by the AO but the same was deleted by the ITAT.
42. We have gone through the orders of the Tribunal in the cases of Nav Manav Sansthan & Virendra Bhatnagar Sansthan and find that the Tribunal, on identical facts, has deleted the identical addition of Rs.4.45 lakhs on account of contribution made to Vasant Kunj Building in the case of Nav Manav Sansthan and contribution of Rs.16,41,779/- in the case of Virendra Bhatnagar Sansthan. The relevant Para of the Tribunal's order dated 27.02.2009 in the case of Nav Manav Sansthan are 51 & 52 and the relevant Para of the Tribunal's order dated 13.03.2009 in the case of Virendra Bhatnagar Sansthan are also 51 & 52. Respectfully following the Tribunal's orders in the identical cases, we uphold the order of the learned CIT(A) in 69 deleting the addition of Rs.4,75,000/- on account of contribution made by the assessee to the Vasant Kunj School Building.
43. Last ground No.5 is directed against the order of the learned CIT(A) in deleting the addition of Rs.5,00,000/- made on account of ad hoc addition under the head "Books of Account".
44. The AO made the addition of Rs.5 lakh by observing that the books of account were not maintained properly. He further stated that identical addition has also been made in regular assessment in the Assessment Years 1998-99 and 1999-2000 and a further addition of Rs.5 lakh is made in the block assessment to cover the discrepancies in the books of account noticed by him besides disallowance of bogus expenses made by him.
45. On an appeal, the learned CIT(A) deleted the addition by observing that the AO has made this addition purely on ad hoc basis without bringing on record any material to justify the same. The learned CIT(A) further observed that the AO has not brought on record any seized material on the basis of which, such an addition on account of undisclosed income could be made in the block assessment. The learned CIT(A) therefore, deleted the addition.
46. We have heard both the parties and perused the orders of the authorities below. In the light of the reasons given by the learned CIT(A), 70 we find that the learned CIT(A) has rightly deleted the addition inasmuch as the AO has made this addition without there being any supporting seized documents or material. It is further noticed by us that identical addition was also made by the AO in the case of Virendra Bhatnagar Sansthan of Rs.5 lakhs under the head "Books of Account", and on appeal, the Tribunal uphold the order of the learned CIT(A) in deleting the addition. The relevant Para of the Tribunal's order dated 13.03.2009 in the case of Virendra Bhatnagar Sansthan are 53 to 55, which have been perused by us.
For the reasons given above and respectfully following the view taken by the Tribunal in the case of Virendra Bhatnagar Sansthan, we do not find any justification to interfere with the order of the learned CIT(A) in deleting the addition of rs.5,00,000/- made by the AO under the head "Books of Account".
47. In the result, the appeal filed by the assessee is allowed in the manner as indicated above and that of the revenue is dismissed.
48. This decision is pronounced in the Open Court on 30th September, 2011.
Sd/- Sd/-
(K.G. BANSAL) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 30th September, 2011.
71
IT(SS)A Nos.33 & 80/Del/2005
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.